Use of Leverage, Short Sales, and Options by Mutual Funds
47 Pages Posted: 22 Mar 2017
Date Written: March 20, 2017
We study the use of leverage, short sales, and options by equity mutual funds. Consistent with agency-induced motives for the use of these complex instruments, we find that they are often used by poorly monitored funds, and are associated with poor outcomes for investors such as lower performance, higher idiosyncratic risk, more negative skewness, greater kurtosis, and higher fees. Consistent with moral hazard, we also find that mutual funds that use these instruments hold riskier equity positions. Mutual funds attempt to use complex instruments to reduce the risk of their portfolios but in an imperfect and costly way.
Keywords: mutual funds, leverage, short sales, options, complex instruments, fees, performance, risk
JEL Classification: G11, G23
Suggested Citation: Suggested Citation